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Most Valuable Sectors

The second segment of the Insights Section focuses on the most valuable companies and sectors. We have selected sectors that contributed 5% or more to the total market capitalization of the Top 500 companies. Thus, we arrived at the most valuable sectors - Software & ITES, Banking, Oil Refining & Marketing, Telecom Services, Heavy Engineering and Power.

While this section features the Software & ITeS sector that has been on a fast track for almost a decade, it also covers Telecom Services, which is among the fastest growing sectors. Sectors such as Power and Heavy Engineering are extremely promising, with abundant business and could well be the next big trigger for the Indian economy.

The Most Valuable

The most valuable companies account for 20% (100) of the Top 500 companies. In this section, Energy refers to the Oil Refining and Marketing and Power sectors jointly.

Not only do these sectors contribute to the market cap in a big way, but they have also witnessed an impressive growth in their top lines as well as bottom lines. For instance, the Software and ITeS sector reported a 39.6% rise in total income, while the Banking sector followed with a robust 25% growth. In terms of bottom-line, Oil Refining & Marketing posted a jump of 47%.

The charts highlight the ownership pattern and the market cap wise distribution of the companies in these most valuable sectors:

• In terms of number of companies, Private Indian banks and PSU banks are almost equal in numbers in our sample. However, there is only one Private foreign bank.

• Oil Refining & Marketing sector is dominated by government owned companies while the Private Indian companies dominate the Software & ITeS and Heavy Engineering sectors.

• In terms of market capitalisation, the Software & ITeS sector ruled the roost with 13.2% share in total market cap of the Top 500 Companies, followed by the Banking sector. All the telecom companies in this sample were under the large cap segment.

Oil Refining & Marketing rings loud

Among the most valuable sectors considered, Oil Refining & Marketing emerged as the fastest growing sector in terms of profitability, followed by the Software & ITeS and Heavy Engineering sectors.

In terms of growth in turnover, the Software & ITeS sector led the race with a robust growth of 39.6%, followed by the Heavy Engineering and Oil Refining & Marketing sectors which depicted healthy growth rates of 28.9% and 25.4% respectively.

The chart below highlights growth of sectors based on key financial parameters

Most valuable and most liberal

The most valuable sectors also emerged as most liberal. In FY07, the companies in these sectors paid 38.5% of the total dividend paid out by all Top 500 companies.

The chart depicts the distribution of total dividend for the most valuable sectors:

The Bank ing and Oi l Re f ining & Marketing sectors distributed the largest dividends, followed by the Software& ITeS sector. This underscores the strong bottom lines, healthy accumulated reserves and also the thriving business model and strong cash flows.

Banking with vigor

The Banking sector is playing a crucial role in supporting the current economic boom in India, and in turn is also one of the major beneficiaries of the economic prosperity. This is apparent from the higher credit deposit ratio of 74% and the unabated growth in total advances. There are 38 Banks in India’s Top 500 Companies 2007 list, including PSUs, private and foreign banks. Here are few key highlights:

• Operating expenses stood at 26.2% of the total expenditure for the sector. The operating expenses mainly comprises of the administrative expenses including staff cost, office running expenses and likes. With the interest at a high and increasing interest expenses on banks operating expenses is the area where banks can look to reduce them and increase their profitability. This also indicates how efficient are the banks in utilising their assets. Operating expenses rose 11.5% y-o-y mainly due to increase in employee cost to the banks

• The cumulative Credit Deposit ratio for all the banks covered is close to 74%.

• Ratio of Cash Credit and Term Loans to Total Advances was 93.59%. With term loans forming 58.2% of the total advances.

• In terms of growth, the total advances for all banks grew at an average of 31.1%, while the fee based income and interest income grew by 28.11% and 28.17% respectively.

The chart above depicts the operational performance of some major banks. For the sake of comparing efficiencies among the two bank groups, namely PSU & Private; 8 PSU and 4 private banks were selected on the basis of market capitalisation.

PSU Banks improve efficiency prior to Basel II

The PSU banks exhibit improvements in operational efficiency. Operating expenses as percentage of total expenditure have been declining consistently for the past three years, as they gear up for the future challenge when the Basel II norms would come into force from March 09. Further for Indian Banks having operations in even one foreign destination these norms will apply from March 08 onwards.

Key pointers:

• Ratio of fee based income to total income is higher for private sector banks compared to the PSU banks, highlighting the emphasis of private banks on fee based and specialized services. This also spells an area of opportunity for PSU banks. In fact, the component of fee income has been increasing for PSU banks, while that of private banks is showing a dip, mainly due to impressive growth in interest income. For this analysis three financial years (FY05 to FY07) are taken into consideration.
• The ratio of operating expenses to total expenses for private sector banks shows a sharper decline as compared to that for PSU banks, indicating the former’s ability to efficiently utilize their resources and realize higher growth in revenue.

Cash credit forms a major component of lending for PSU banks, though it has been declining over the last three years. Moreover, after Basel II norms become effective, it is likely to go down further, with requirements of lending to rated corporate debts.

The sector has witnessed consolidation; it is poised to stay in consolidation mode in the coming year through, March 09 and it could witness mergers between PSU banks and private banks.

Powered by thrust on infrastructure Heavy Engineering / Capital Goods is on the dream run

After Software and Telecom, it is the Heavy Engineering / Capital Goods sector that has been emerging as the next big theme which would grab the attention of the investors, policy makers and entrepreneurs. The sector includes engineering goods and equipments – light & heavy and forms a part of the basic industries group. The companies covered in this sector are involved in development of country’s infrastructure.

• As the sector caters to needs of other industries, operational capabilities of the companies in the sector differ accordingly.
• That the sector is in a very favorable position is apparent from the 87.3% rise in capital WIP expenditure, mainly on account of capacity expansion.
• Interestingly, it is also the overseas market that is providing a revenue push to this sector. The exports contributed 11.9% of the combined total income of the sector. The exports of capital goods includes machineries for textiles, construction equipments etc.
• Intangible assets (i.e. goodwill and technical know-how) were less than 1% of the total net worth of the sector.

The power sector has emerged as a major growth driver for this industry, through execution of new power projects undertaken by power generation companies.

Power On

The Energy sector includes the Oil Refining & Marketing and Power segments. The performance of the Energy sector needs to be reviewed in the context of consistently increasing oil prices. The financial results of companies in the Oil Refining & Marketing sector disclose over 47% growth in profits due to higher refinery margins.

• This sector tops the revenue charts. It accounts for 29.8% of the cumulative total income of the Top 500 companies and comes in second in terms of profitability with net profit contribution at 11.7%.
• The increase in total income and EBITDA is due to growth in sales, subsidies received by PSU companies from the government and higher oil refining margins. Further, as the sector has undergone a phase of mergers and acquisitions during the year, financial performances of the large players show the consolidated effect of M&As.
• The PSU oil companies suffered a huge loss in terms of per litre of fuel sold. However this was largely compensated by government subsidy in the form of oil bonds. The chart below shows details of subsidies received by top three PSU oil companies.

The highlights of the Power sector are noted below:

• Overall, a very positive outlook for the sector, as huge investments have been announced by the government to reduce the power deficit in the country.
• Major capacity expansion plans undertaken by power generation companies to increase power generation that has led to considerable increase in capital WIP by nearly 43%.
• The funds employed in expansion plans have resulted in increase in the component of debt and interest. Dependent industries such as Heavy Engineering and Power Equipments to gain from the thriving power sector.

The financial performance of the power sector witnessed a steady growth in terms of total income, EBITDA and profit after tax. The power generation, transmission & distribution companies enjoyed healthy EBITDA margins of 30.2% with NPM at 17%. Presently, there has been no substantial effect on depreciation as there has been no major increase in fixed assets since projects are under execution stage. The current emphasis on capacity expansion would shore up financial numbers once Capex plans are fully implemented and go on-stream in the medium to the long term.

Software sports mature look

Over the years, the Software and ITeS sector has emerged as one of the major service sectors in India. No wonder then that among the Top 500 companies, the Software and ITeS sector holds the largest share in market capitalisation at 13.2%. Moreover, all the companies from this sector are part of large cap segment. Some key insights related to the sector:

• The share of exports to total income was on the higher side at 85%. Also, the sector witnessed a growth of nearly 48% in exports on y-o-y basis.
• It also saw the entry of new players providing IT- enabled services.
• Surprisingly, intangible assets constitute a mere 0.3% of the total net worth for the Software sector. The intangibles in case of software companies comprise mainly of software, copyrights, trademarks and goodwill.

Some problems that seem to be impacting the sector, such as the appreciating rupee, US credit crisis, rising operational cost particularly salary levels, high attrition rate, could imply that the sector is likely to deliver less exciting growth numbers compared to the immediate past.

Telecom Services amass intangibles

Intangible assets form a substantial part of the total assets of telecom companies, and in fact account for the largest chunk among all sectors. This is despite the relatively low number of Telecom companies (1%) in the Top 500 Companies list. Intangible assets contributed nearly 10% of the cumulative net worth of the companies featuring in Telecom sector. These intangible assets are in the form of telecom licenses acquired by the companies for providing telecom services in different circles across the country.

The sector shows growth of nearly 28% in CWIP, due to the heavy expenditure by new players to enter in to new service coverage area.